How to Calculate Software ROI for Custom Products

When planning a custom software project, estimating your software return on investment (ROI) is critical. Whether you’re building a customer-facing SaaS platform or an enterprise app for employees, you must be confident that your investment will pay off. 

But each company and project is unique. How can you know what kind of return to expect?

Custom software can deliver measurable benefits, like improved productivity or revenue growth, but not all advantages apply to every type of business. In this article, we’ll look at several of the most common drivers of ROI and offer some guidance on how to assess the business impact of each. Then you can apply the ones that make sense for your situation and calculate your software ROI so you can make confident business decisions. 

TL;DR: Quick Summary

• Software ROI = (Gain from Investment – Cost of Investment) / Cost of Investment × 100
• Key ROI drivers include increased sales, customer retention, time savings, and cost reductions
• Common costs include development, bug fixes, hosting, and feature upgrades
• Tracking KPIs like churn rate and productivity helps monitor performance
• ROI should be evaluated over time—expect a ramp-up period

What Is Software ROI?

Software ROI Formula
(Gain From Investment – Cost of Investment) / Cost of Investment × 100

Software ROI (Return on Investment) is a key performance metric that measures the financial benefits of an investment, relative to the cost. A positive software return on investment indicates that the platform or tool helps the business become more profitable; whereas, a negative ROI means the company is losing money due to the investment. 

Calculating ROI involves comparing total value, including things like time saved, reduced expense, errors avoided, or revenue generated, against development, implementation, and ongoing costs. Software ROI is typically expressed as a percentage that helps companies evaluate whether a product or technology offers a compelling financial advantage. 

While this article focuses on measurable, quantitative ROI ("hard ROI"), many companies also consider qualitative benefits like employee morale, customer satisfaction, or competitive positioning. These "soft ROI" factors may not be part of the formula, but they still play a valuable role in decision-making.

Why Measuring ROI Matters for Custom Software

Brands are investing heavily in custom software development as they race to provide better experiences. Gartner research projects IT spending to hit $4.6 trillion worldwide in 2023. For reference, that sum of money is higher than the GDP of every country except for three. So what do businesses get in return for their costly investments in software?

Simply put, calculating the ROI of your software development project helps you understand the impact of your technology on the business. Here’s what calculating your ROI can do for your business: 

• Win over key stakeholders, including investors, executive leaders, and key teams 
• Guide the build vs. buy software decision with financial data
• Establishes key performance indicators (KPIs) to measure the success of new products
• Set clear expectations for short-term vs. long-term value

Knowing the ROI of your custom software allows you to determine if the project was worth it. Tracking the performance helps you understand the business better and will guide future decision-making.

How to Calculate Software ROI (With Formula) 

The formula itself is simple:

(Gain From Investment – Cost of Investment) / Cost of Investment * 100

In other words, you’re dividing your net gain by the cost of your investment, then multiplying the result by 100 to put it as a percentage. 

The hardest part of completing this equation is recognizing the full cost and potential gain from your investment. The effort is worth it, so let’s dive into some of the ways you can calculate the return on your investment in custom software. 

Key Revenue Drivers of Software ROI

To generate revenue, your custom software must solve a real problem for people. The bigger and more pressing the problem is, the more money you stand to make. When you consider the top web applications, you’ll find that all of them solve problems for their users. The following questions can help you uncover which type of problem your custom software development project will solve.

Will It Help You Sell More of Your Existing Products or Services?

Custom apps can provide answers to this question. A mobile or web application that provides a better customer experience improves the offering. As a result, the business is likely to generate more sales.

Consider the time savings Starbucks provides with its app’s online ordering capability. Customers no longer have to wait in line, so more people will be able to stop in for a purchase, even when they’re in a rush. Panera has experimented with the same concept, eventually developing a popular customer loyalty app.

Will It Help You Sell a New Product or Service?

In the age of app-driven services, custom app development can be the key that opens the door to a completely new product or service. Think Lyft, TaskRabbit, Headspace, and Spotify. Many of the best enterprise apps are standalone products. 

Potential revenue from a brand-new offering is notoriously difficult to predict. Existing companies can estimate potential revenue based on historical numbers from similar products or services with a similar target market. High-growth startups should be cautious and err on the conservative side when projecting revenue.

Will It Help You Retain Customers That May Otherwise Leave?

Customers’ situations change, and what used to be convenient may no longer be. Barre3 has a loyal customer base, but not everyone can consistently get to a studio if they don’t live near one. Customers who move or whose schedules change can access workouts via an online hub, where they can also participate in challenges and find tips and advice, just like in the studio. Take a look at your customer churn rate, and send a survey to old customers, asking if an online offering would be attractive to them.

Learn more: Most Important Mobile App KPIs to Measure

Will It Reduce the Resources Dedicated to Customer Service?

Customer service is a significant expense to many businesses. What if you could reduce that cost with the help of automated software? When customers can find the answers to their questions easily online or conveniently service themselves, you can cut costs. 

You’ll need to estimate the amount or number of resources that could be saved in your specific business process. Could you save 10%? 20%? More? Then there’s the opportunity cost — what else could your employees do instead of getting distracted by unnecessary calls?

Will It Save Your Employees Time?

As we’ve just mentioned, your team members’ time is money. If you help your employees be more productive or efficient, what will that do to their throughput? How will that work help you move toward your goals? Automating business processes frees time that your team members can spend on more important work.

Will It Improve Asset Management?

How would custom software help you improve maintenance if you operate a facility? Will it enable you to better manage inventory? How much money are you currently wasting on downtime?

Will It Improve Supply Chain Management?

Would business intelligence that gives insight into bottlenecks and slowdowns allow you to make changes that will improve your processes? How can you improve communication with your vendors, partners, and clients? What would increased speed do for your profitability?

Learn more: Ultimate Guide to Client Portal Software

Will It Help You Avoid Fines and Other Costly Mistakes?

Mistakes are costly, especially when they trigger fines. HIPAA, OSHA, or GDPR violations can be significant, and if you’ve ever experienced these, you know how they can hurt. Custom software can provide systems that minimize your risk and create a paper trail to demonstrate your diligence in case you’re audited.

How Will You Monetize Your Custom Software?

Once you identify how the software creates value, define how your business will capture it:

• Sell access via subscription (SaaS)
• Use it to win or retain clients
• Expand into new markets or channels
• Reduce per-user cost as scale increases

The clearer your monetization plan, the easier it is to calculate expected gains.

Example Software ROI Calculation: Let’s say you invest $150,000 in building and launching a custom platform. In the first year, it helps you:

• Retain 50 customers worth $1,000 each = $50,000
• Save 1,000 hours of employee time = $40,000
• Increase upsells = $30,000 Total gain = $120,000

ROI = (($120,000 – $150,000) / $150,000) × 100 = -20%

While the first-year ROI is negative, long-term gains could push you into profitability by year two.

Tracking Your Revenue

Revenue attribution is pretty simple for a startup with a single technology product. 100% of your revenue comes from your app. Things are a bit more complicated for enterprises. If you’re adding a technology product to retain your clients for longer, what’s the impact on your customer churn rate? How can you see that change in the bottom line?

Important Software Cost Considerations to Include 

Custom software development can solve all types of problems and offer various benefits depending on the situation. It’s important to add all that apply, but the value of your solution is only half of the equation: the revenue. The other component that impacts profitability is the size of your investment. 

In other words, it’s time to examine the cost of custom software. Initial development is only one element of the total cost. We can’t forget about maintenance and improvements. Here are some things worth considering.

Initial Development

Expect a scoping process that breaks down features and the cost per module. A basic MVP may cost $30,000–$100,000, while complex platforms can exceed $500,000.

Examples:

• The MVP for a simple dating app might cost less than $50,000. 
• The operating expenses of Match Group (which runs multiple dating apps, including Tinder, Match.com, OkCupid, and PlentyOfFish) were in excess of $2.5 billion.

The range can be just as broad for other expenses like maintenance, hosting, and upgrades. Finding an experienced partner with a trusted process can help you come up with a more precise estimate.

Scoping early helps prioritize value-driving features and control costs.

Ongoing Bug Fixes 

All software encounters bugs. Build in buffer time and a process for issue tracking and triage. Your vendor should offer a typical post-launch bug support estimate.

Hosting 

The cost of hosting will vary depending on the requirements of your specific solution. The range is so big it would be irresponsible to make a one-size-fits-all estimate here. For reference, Facebook spent $85 monthly on hosting when running out of a dorm room at Harvard. By 2009, it had spent more than $20 million just for the space to house its servers. That doesn’t even include the cost of the servers, which is much higher!

Fortunately, your software company can tell you what to plan for. The big consideration here is to choose between a one-time investment and opting for the subscription model:

• Buy Software Hosting Upfront: Investing in a fixed asset like an on-premises data center is much more costly upfront, but might save you money in the long run. This is considered a capital expenditure (CapEx).
• Rent Hosting: Cloud hosting allows you to bypass the large investment upfront with a simple subscription. This is considered an operating expenditure (OpEx).

Many of our clients seem to appreciate treating hosting as OpEx. However, investing in hosting as a capital expense still makes sense for some enterprises. It all depends on your finances and existing tech stack.

Feature Upgrades 

Plan for iteration. New feature requests, market changes, and user feedback will drive future development.

MVP planning should include a list of features to add later and rough cost estimates per feature or module.

KPIs to Track Software ROI Over Time

Measuring ROI doesn’t stop at launch. Monitor the following KPIs:

• Customer Churn Rate: Are you retaining users longer?
• Total Cost of Ownership (TCO): What’s the all-in cost over time?
• Time to Value (TTV): How quickly do users gain benefit?
• Return on Time Saved: Value of operational efficiency
• Productivity Gains: Measured improvements in throughput, accuracy, or satisfaction

Setting Reasonable ROI Timeline Expectations 

You can’t predict ROI with 100% accuracy. For this reason, tracking expected performance against the actual return on investment may be helpful. Recognize that even a successful project isn’t a silver bullet. These factors can affect the time it takes to realize measurable benefits as a result of your software investment: 

Ramp-up time → Allow sufficient runway for users to train and onboard. Adoption may take some time to grow to the level you expect. 

Payback period variability → Various factors, including the industry, market conditions, and competitive landscape, affect the time it takes to recoup your investment. Set a realistic timeline for when you expect to recover costs. 

Short-term v. long-term value → Success looks different depending on your time consideration. Short-term wins might include better team workflows or higher satisfaction, while longer-term metrics might be healthier profit margins or reduced employee turnover. 

How Can You Predict Costs and Profits for Your Custom Software Development?

Once you know the potential costs and returns, calculating ROI is easy: (Net Profit / Cost of Investment) × 100

The hard part is modeling those inputs. That’s where strategic planning, benchmarks, and experienced partners come in.

Work with your software development team to scope a realistic plan, define KPIs, and build an iterative approach.

Ready to evaluate ROI for your next project? Let’s talk.

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